What Is a Good Credit Score to Buy a Car?

Read the Article

Next to purchasing a home and financing an education, buying a car can be one of the largest purchases most people make in their lifetime. Along with being a large and often expensive purchase, there are a lot of factors that go into purchasing a car. 

One of the most important ones to keep in mind is your credit score. Your credit score is a measure of how trustworthy of a borrower lenders are likely to find you; it’s based mostly on your history as a borrower, including factors like your current debts, the number of debts you owe, and whether you have a track record of making payments on time. 

Your credit score can directly affect your car-buying process because, for most lenders, it’s one of the factors that go into determining your interest rate — or, part of the cost you pay to take out a loan. That leads many consumers to ask what, “What credit score do I need to buy a car?” The answer can depend on a wide set of variables, including the lender’s policies and the make and model of car. 

In general, a good credit score to buy a car should be above 660.

Read through to find out more about the relationship between your credit score and auto loan interest rates, or skip ahead using the links below. 

What your credit score means

It’s okay to be a little confused about what exactly your credit score means, and how it affects your overall financial well-being. Credit scores are a metric representing data compiled by the credit reporting agencies: TransUnion, Equifax, and Experian. These companies devise this number based on your history as a borrower, including past debts, current debts, and how diligent you’ve been about paying back debts in full and on time. 

Scores can range from 580  to 850. A good credit score means that, so far, you’ve done a good job of taking out loans (or using your credit card) and paying them back in a timely manner. A rougher credit score implies that you may have had some trouble with borrowing money in the past, like making late payments, defaulting, or filing for bankruptcy. 

What does that have to do with car ownership? Well, unless you’ve saved up a pretty big chunk of change, you’ll likely be financing your purchase; i.e., you’ll be taking out a loan from a bank or lending agency. When determining the interest you’ll pay on that loan (the percentage added to the amount you repay as the cost of taking out the loan), your auto loan provider will use your credit score. 

Other things being equal, a higher credit score will secure you a lower interest rate, and a lower score may land you a higher rate. 

Auto lenders may use different scores

As mentioned above, there are three credit reporting agencies, and two prominent credit scores that they provide:

  • VantageScore
  • FICO

Each has its own methodology, and when getting a credit check, you might find your credit score is different depending on which of the two credit scores the checker uses. Different auto lenders might use different metrics, so if you’re worried about your credit, you might want to do some research ahead of time before deciding on a lender. 

What credit score do I need to buy a car?

There’s no official minimum credit score to buy a car, as technically you can buy a car with just about any credit score — especially if you buy a used car in cash, for instance. However, if you choose to purchase a car from a dealer, whether new or used, there are some general credit score guidelines to follow. 

As stated before, a FICO score above 660 is generally best when applying for an auto loan. This can vary depending on other factors, like the size of your down payment, for instance. However, 660 falls just below the FICO “Good” credit score category. So, shooting for just above that gives you a better chance of getting a more manageable interest rate. 

An auto loan credit score of around 660 also falls in the middle of the VantageScore range, which should put you in better standing when trying to apply for an auto loan. Of course, no matter what scoring metric the lender uses, the higher your score, the better the interest rate you can expect. 

In addition to your credit score, your interest rate also depends on the car that you choose to purchase, and can depend on whether you purchase it new or used.

New car

If you’re hoping to secure a loan for a new car, it’s likely that in order to get a favorable interest rate, you’ll need a higher credit score — think over 700 for a rate under 5%. Another cost of a new car is insurance. Newer cars are generally more expensive than used cars, and though insurance rates depend on a variety of factors, having a brand new car can lead to higher insurance payments. Be sure to factor these costs into your considerations when thinking of purchasing a car brand-new. 

It’s also a good idea to look for external financing, rather than getting financing directly from the dealer. According to Consumer.ftc.gov, in-house financing tends to be a worse deal than those offered by other lenders. 

Used car

In addition to being generally less expensive, used cars can come with lower credit requirements for securing a lower-interest loan. That previously mentioned 660 credit score may be enough, depending on your lender and the dealer, to secure a used auto loan at a more favorable interest rate than you would receive if you were buying a new car.  Used cars also tend to be less expensive to insure, and depreciate less quickly than new cars, making them often a wise financial decision. 

Buying a car with bad credit

There’s no official minimum credit score to buy a car, new or used, but those with poorer credit may have a harder time finding favorable loan conditions. This is because you’re less likely to be approved for a loan below a certain point, and if you are, the interest rate can be pretty steep. 

Auto loans marketed to people with low credit scores are referred to as subprime loans. According to the Consumer Financial Protection Bureau, there are five borrower risk profiles used by lenders to categorize loans:

  • Deep subprime: below 580
  • Subprime: 580-619
  • Near-prime: 620-659
  • Prime: 660-719
  • Super-prime: 720 or above

When taking out a subprime (or deep subprime) auto loan, you may face steep fees and high interest rates, as the lender perceives you as a potential risk. Even worse, those with low credit profiles may be targeted by lenders looking to take advantage of this opportunity to charge more; that means subprime loans can be particularly risky

When purchasing a car with poor credit, one of the best things you can do to lower your potential interest rate is to save up for a large down-payment. You may also consider purchasing a more inexpensive car and wait a while as you build up your credit score in order to get approved for a favorable loan. 

Getting the best auto loan you can

It’s important to get the best auto loan you can to avoid the unnecessary expense of a high interest rate and burdensome fees. Here’s what you can do to ensure you get a better rate:

  • Be diligent about paying back your current loans. This includes your monthly credit card bill, student loan payment, personal loan payment, or any debt you may have.
  • Stay on top of other aspects of your finances, like paying taxes and making rent each month.
  • Save up money for a down payment before getting serious about investing in a new vehicle.
  • Establish a monthly budget that helps you stay on top of your car payments once you do secure an auto loan — the Mint app can be especially helpful when planning your month’s spending.
  • Remember to stay within your budget when shopping for cars. Sure, that luxury sportscar may look appealing, but it’s smartest to purchase a car within your means, then save up to get a flashier ride once you’re on firmer financial footing. 

It’s smart to shop around a bit when looking for an auto loan provider. However, one thing to be mindful of as you shop around for an auto loan is that a large number of hard credit checks can hurt your credit score

When you get preapproved for a loan (when the bank or other lender gives you the okay, basically), they will likely pull your entire credit history in order to ensure they match you with the right rate. Doing that too many times may cause your credit to drop a bit, so it’s important to be mindful of this as you shop. 

Finding the right car for your lifestyle, and one that suits your budget, can be a challenge. Knowing what aspects of your personal financial profile to prioritize helps. As you build up your credit score to buy a car, and set up a budget, Mint can help you keep your eye on the prize by giving you a bird’s-eye view of your finances. Check out the Mint app, and be sure to check out our full buying a car guide for more information. 

Mint
Mint

Written by Mint

Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint

Sources

Consumer.ftc.gov | MyFICO.com | USA.gov | Transunion | Debt.org | AllState | ConsumerFinance.gov 

Leave a Reply

Your email address will not be published.